Thank you, everyone, and good afternoon. For our next session, I'm delighted to welcome for the first time to the SDC, Andy Saperstein, from Morgan Stanley. Andy is the Co-President and Head of the Wealth Management Business at Morgan Stanley. As many of you know, wealth management is now the biggest business at Morgan Stanley, and its strong growth has really been a key contributor to the stock outperformance over time. With that, let us have Andy here. Hopefully, he'll be able to delve into more details around the business growth prospects. Andy will present a few slides, then we'll sit for Q&A. Before we get started, I have to read a brief disclaimer.
The discussions may include forward-looking statements, which reflect Morgan Stanley's management's current estimates and subject to risks and uncertainties that may cause actual results to differ materially. Morgan Stanley does not undertake to update the forward-looking statement. This discussion, which is copyrighted by Morgan Stanley and may not be duplicated or reproduced without their consent, is not an offer to buy any security. With that, Andy, the stage is yours.
All right. Afternoon, everybody. Thanks for having me, Christian. It's great to be here. I have some prepared remarks. First, where I'll talk about the wealth management business for about 20 minutes or so, and then I'll take questions, and I'll discuss Morgan Stanley overall and broader industry trends or whatever you'd like to discuss. Turning to wealth management. Over the past decade, we've completely transformed the business. We're at a different point in terms of client segments, channels, technology, support capabilities, even the role of the advisor has been completely transformed, and the results demonstrate that. We've described our organization as a category of one. That refers to our performance, our business model, and the innovation we continue to drive to give our clients a distinctive experience on our platform.
My message today is that despite all the success that we've had so far, everything we've accomplished to date has only gotten us to the starting line. We believe that we're poised for a period of accelerated growth from this point forward, and that's what I'm going to cover with you today. If you look at the evolution of our business, we've gone through four distinct phases. Phase I was about building scale. Wealth management is the ultimate scale business, and Smith Barney gave us scale. Phase II, which we called modern wealth management, was about supporting the advisor with cutting-edge technology to help them become more productive. During that phase, we leveraged the scale that we built by investing in technology and building out our modern wealth platform.
That was a critical phase in our evolution because it started our transformation into being a technology and innovation leader. Some technology we built, but we also began to create partnerships within and outside of the business. That approach is now deeply ingrained in how we run our business. We're continually looking for game-changing technology to integrate into our platform. One recent example of that approach to innovation is our partnership with OpenAI. That relationship began well over a year ago, before they were a household name. In phase III, we reached new client segments, and we expanded our service channels. There's a couple of ways in which we did this. The acquisitions of Solium and E*TRADE helped us to capture a younger client segment in their wealth accumulation years.
We became a powerhouse in the workplace channel, the acquisitions also gave us a digital direct platform and brand to reach self-directed clients. We didn't stop there. Our goal was to expand our target addressable market. We knew that there were additional client segments with needs that weren't currently being met. What we did is we looked for fragmented markets where we felt we could provide a differentiated offering that met those needs and enabled us to consolidate share. Areas like family office, institutional consulting, and private markets. Now, we're positioned to target virtually every segment within the $50 trillion wealth management asset pool. Stepping back, we've gone through this long transformation, and we've had a lot of success. Everything we've done, we've done to set the table for right now, which is phase IV.
This is where we create disproportionate growth by deepening those relationships and ultimately converting them into advisory clients over time. You look at this page, you can see that our transformation has been really deliberate. The next page illustrates our unique position. We're clearly the industry leader across the key wealth management metrics in terms of both size and growth. To be a scaled growth player with accelerating momentum is a really powerful combination, that's just part of the reason why we believe that we're a category of one. You go to the next page, you can see that category of one also refers to the fact that we've reinvented the wealth management business model, and we've done it at scale.
Many clients want us to engage with their wealth manager across multiple channels. We've been building out our model to meet them wherever they are and grow with them over time as their needs change. Not too long ago, our reach was just 2.5 million relationships. In a relatively short period of time, today, we now touch 18 million relationships. We've added channels, we've expanded service models, and we've added capabilities. We have a wide range of products and services, a world-class platform to service those broad needs. No one else in this space can compete with us across that entire spectrum of services. That's an important differentiator. One thing I just wanna highlight is that the secret sauce isn't just having the capabilities, it's integrating them. It's impossible to overstate the importance of that point around integration.
It is something that I think is consistently ignored, maybe because it's really hard, but maybe because it's just not sexy or fun to talk about. Think about the process of simply referring a workplace stock plan participant to an advisor. At the outset, you have to make sure that the company will contractually agree that you can market to their employees at all. You have to identify the employees who are the best candidates for full service advice relationships. That requires gathering information from internal and external sources, and you need to build the data and analytics capabilities to deepen those relationships and predict their needs. You need to educate them so they understand the value of advice, and those interactions need to be customized to their financial situation and their personal situation.
When you finally get to that referral stage, you need to identify an advisor that's most suitable to working with that prospective client. That process alone requires a tremendous amount of data and analytics, again, to evaluate all the client's interactions with the platform, and then you have to use that to identify what advisor has the highest propensity to deepen that relationship. Once you finally make the referral, the advisor has to see all the relevant information that you collected over that period of time. You need to monitor and track progress, have all the appropriate controls in place, and most importantly, to the client, all of that has to be completely seamless, because to them, you're one firm serving their needs in multiple ways.
If what I just described sounds involved, you have to remember that on top of all that, there are multiple data systems with different data security architectures, different third-party vendors that are all involved. Not only requires a massive amount of coordination, that's not possible without some of the advanced machine learning tools that underpin each step of the process. All that combines to illustrate that it's the ecosystem of how the various parts work together. That's the true competitive advantage of what we built. It's taken us years to create this. We've been very disciplined about it. There are no shortcuts. I know folks love to believe that there are shortcuts, but there's not. It took a lot of investment, and it's really difficult to do.
That's why we believe that we have a sort of moat around our business, because competitors would have to build that type of ecosystem. Again, in my view, that ecosystem is by far the most underappreciated aspect of what it takes to be truly successful in wealth management over time. Let's turn to the next page, where we can begin to talk about our growth. As you know, the platform I just described is designed to drive organic growth. That's what we're built to do. We've built a powerful growth engine. I mentioned in the past that we'll see variability from quarter to quarter, but even in this environment, which is clearly a difficult one for asset gathering, we brought in $110 billion in the first quarter. In our second quarter...
Second quarter, if you think historically in wealth management, is always a difficult quarter because of taxes. You know, historically, most second quarters, there's negative NNA, and yet our second quarter NNA remains quite strong. We're generating $1 trillion over a rolling three-year period. I've stated that before, and I'm confident that'll continue. I mentioned earlier that we're at the starting line because despite our differentiated performance to date, the strongest period of growth is still ahead of us, and we focused on three numbers. The first is increasing the number of client relationships. We know by expanding the number of households we touch, that we'll have more opportunities to build advice relationships across a client base. Assets and PBT are outputs from the targets that James has already communicated.
I'll go into some detail on the PBT target in a minute. In essence, we're helping our advisors grow so they can do what they do best, which is to give great advice and introduce our clients to all that Morgan Stanley can offer them. You have to understand, that's new in wealth management. Historically, FA has brought in all the relationships. We've now built a prospecting machine that creates millions of new relationships for Morgan Stanley and refers them to our advisors if and when they need advice. It's an ecosystem made possible by the seamless integration of our channels and capabilities. Growth can't happen without our advisors, our client acquisition funnel greatly augments that growth. Let's turn to that client acquisition funnel. In 2019, every one of our 2.5 million relationships was brought in by an FA.
It was a person that we had met personally and we had signed a contract with. That's the way wirehouses worked. The transformation of our business model focuses on creating client acquisition channels from multiple sources so that we no longer just rely on our FAs to source new relationship. Instead, we're sourcing new opportunities for them and helping to make them more effective and more productive and grow faster. You've seen the funnel before, it effectively and simply captures the strategy. We're building a massive asset acquisition funnel that starts in areas like the workplace or with a self-directed investor, it's ultimately designed to end up in a full-service advice relationship. The funnel's already generated significant throughput. In the first quarter alone, we had $28 billion in advisor-led flows that originated from workplace relationships.
It's very likely these assets would never have come to Morgan Stanley before the acquisitions of Solium or E*TRADE, because we wouldn't have even known those clients. Stop and think about that for a moment. That's a really important point because, again, it illustrates the power of the ecosystem I described earlier. Not only would those assets not have come to Morgan Stanley before the acquisitions of Solium or E*TRADE, but very little of that $28 billion would have been captured by a standalone Solium or E*TRADE organization. Why? Neither company had the capability to prospect or service those clients before becoming a part of Morgan Stanley. We were able to deepen those digital workplace relationships and refer them to advisors if and when they were ready for advice.
Once our advisors demonstrated the value of advice, many clients consolidated their assets held elsewhere and brought them to Morgan Stanley. That's the power of an integrated, seamless ecosystem. The pace with which we're adding new relationships gives us great confidence that we'll support the firm's goal to reach $10 trillion in total client assets. Wealth management will reach roughly $8 trillion of that target. At that level, we should achieve $12 billion in PBT and, of course, margins well in excess of 30%. Let's dig into that. Think about it. By the time we hit $8 trillion in assets, our PBT could be more than double what it is today. Let me just give you a sense of how to think about that sort of PBT growth. Consider some of the growth drivers, which are all tied to our increasing number of client relationships.
First, and most importantly, organic growth is the key driver. $8 trillion represents an additional $3.5 trillion of assets. Our net new assets will move us towards that target. Market appreciation will fill in the rest. Remember that those incremental assets are margin accretive because of the scalability of the existing infrastructure that we already built. Secondly, within our pool of assets, we expect a shift. For example, clients are now holding 24% of their assets in cash and cash equivalents. The historical average is 18%. As capital markets rebound, we expect clients to deploy their cash investments to fee-based investments. That augments our ROA and contributes to PBT and raises margin. Finally, attached to those same client relationships is the opportunity to drive additional lending growth.
Even if you assume we continue to invest to support the growth of the business, and when you put all of that together, you get to a PBT that more than doubles where we are today. What jumps out at you from the page is that organic growth determines our future and is our clear focus, and it stems from deepening client relationships. It's precisely what you should be focused on when you consider our business performance. I'll stop here and take some questions, but I'll end where I started. We're really excited that despite all the success that we've had so far, everything we've accomplished to date has only gotten us to the starting line. We believe that we're poised for a period of accelerated growth, and everything's in place for us to achieve that. Thanks.
Great. Thank you, Andy, and yeah, interesting slides. I would love to come back to some of the points you made there, but maybe we just start from the big picture first and step back first on to talk about a few things. Maybe first, just on the macro environment for broad Morgan Stanley and the industry. A lot going on, bank failures, inflation, et cetera. What are your views, basically, on the global economy, on markets, and how are you thinking about that impacting Morgan Stanley's outlook?
Yeah. Obviously, we operate in the same markets as everyone else, and the current environment is tough overall. We've seen volatility across markets for over one year now. There's geopolitical uncertainty, there's fiscal uncertainties. We're dealing with the debt ceiling, which hopefully is getting resolved in the very near term. There's uncertainties around inflation and the Fed dynamics. What I'll say is that, you know, clients across the firm remain very engaged, as you might expect them to, but they're naturally more cautious. You know, in our view, that's the nature of markets. They're cyclical, they can be volatile.
It's also the reason why individuals, companies, investors in general, look to Morgan Stanley and other financial institutions to help them navigate uncertainty and risk. These are the times when we strengthen client relationships, because if you're doing your job right, you've given clients a really good base to work on. You've given them advice when times were good, and they remember that when times are bad, and they're well prepared. You know, in some ways, if you think about it, difficult environments like these, volatility, if they didn't exist, then you wouldn't have a need for advice. If you're a financial advisor, this is when you really stand out.
You can strengthen the relationships with your existing clients, and you can also prospect and bring in a lot of new clients, particularly from clients that feel underserved because they didn't feel like they were prepared for this type of volatility.
Okay. How are you thinking about opportunities that arise from this environment? If I think back, you know, 2008, 2009, Morgan Stanley bought Smith Barney. Around the COVID period, you bought E*TRADE. When you look at the current environment, do you see opportunities with the banks that are struggling or anything of that nature?
Yeah, sure. One thing we can agree on is that we know how to do deals. We're good at them, and we do consider that to be a competitive advantage. It's difficult to first choose the right company and then integrate the right company into yours, both from a complexity standpoint, but also from a cultural standpoint, that we've had really good success on that. What I'd say is that as we've always done, we're gonna continue to look for deals that make a good fit for us.
We've said before, those are likely to be more in the asset or wealth management space, that would be most particular interest for us. We do like our hand, and we obviously have a terrific portfolio of businesses, so we won't reach. If we can find a good deal that makes strategic sense for us, we'll do that deal, but you get in trouble when you reach for deals' sake, and we won't do that.
Okay. The big topic of conversation around wealth managers, you know, in recent times has been deposits. Maybe just talk through what you're seeing on deposit dynamics, how that's shaping up for Morgan Stanley, maybe quarter to date, or however you wanna speak about it.
Sure. We all know that the pace of rate hikes was unprecedented, and it shouldn't be a surprise that it had a negative effect on our sweep deposits as clients sought out higher yielding cash equivalents. That created some volatility, and it certainly put some pressure on our net interest income. We had tax outflows in April, but we have definitely seen sweep deposit outflows moderate in May. We'll see if that continues, we'll see if that continues in June. That's probably not new information for you. It's really no different from what we're seeing in other firms who have also seen the outflows moderate, you know, over the last month or so.
What's most important is that those assets are largely staying within the firm. They're being put to work for by advisors, and for us, that's what's most important, in these types of environments. Like I said, in the meantime, we're focused on organic growth, we're attracting new client relationships, we're bringing in new assets, we're helping clients achieve their long-term goals.
Just to be clear, when you say moderate, you mean it's still outflows in deposits, just that it's a lot less?
We're starting-
Okay.
We're starting to see it flatten out.
Okay, perfect. Maybe just putting it all together, just think about the broader firm and the quarter. Maybe talk through the different businesses and how they are all shaping up, quarter to date.
Sure, sure. Let me start with ISG. You won't be surprised to hear that sales and trading is soft this quarter. Client activity is muted, and results will be notably down year-over-year versus a strong second quarter last year. Investment banking is also very challenged. As an industry, we've been in a sustained trough since last year. Now, with that said, we've seen an increase in announcement in recent weeks, which might foreshadow increased corporate confidence across some sectors. You know, as James has said for a while now, deals are delayed. They're not dead. We know that because our M&A backlog has been building, and that backlog that we're seeing gives us really good confidence for 2024.
You can think of it this way: clients are understandably waiting for longer, prolonged periods of market stability and more constructive capital market environments. We think that institutional clients are acting rationally because these types of conditions, these types of environments, aren't permanent. They'll pass. These are cyclical business, and that's just how clients behave in environments like these. If you turn to wealth management, as I said, the shift in deposit dynamics and some subdued transactional activity put some pressure on margins in the near term. Retail clients, as I mentioned, are cautious, they're rational, but as I described, We continue to see terrific organic growth through the cycle.
Wealth management is the kind of business where it's difficult markets, where you, like, as I mentioned, you not only cement existing relationships that you have, but it's a really good time for prospecting and for growing assets and preparing yourself for a really good run coming out of a difficult environment and coming out of the cycle. That's precisely the way that we think about it. With all that said, the last thing that I'll just mention around it is that we're obviously, we're responsive to an environment like this. We're going through a process to optimize our cost base around the firm. I've mentioned that. We're balancing the challenges of the current environment while protecting future growth.
Excluding FAs and related support staff, which we've cordoned off, the action will impact about 5% of the firm's headcount and result in a severance charge in the second quarter. For the individuals impacted, this is obviously painful and difficult. Nobody, nobody likes to do this, but in the long run, it's the right thing to do for the business overall.
Maybe we dive into more wealth management-specific topics here. You know, compelling presentation and obviously very nice track record of growth for the business. Maybe just stepping back and thinking about disruption in the industry, how do you think about, you know, fintech disruption? Is that a risk to your business model or really more of an opportunity as you sort of integrate with some of these fintechs?
Sure. look, I think you said it really well. I actually, I don't worry about fintechs. People always used to ask me, "Are you worried about fintechs?" I don't worry about them. If anything, I'm excited about them. They're potential partners that offer incredible opportunity for us. Most of those firms, most of the fintechs, aren't looking to compete with us, but rather, what they're doing is they're building some really innovative technology that can solve problems or provide solutions to issues that they know that we face. It's our job to be able to find those types of fintech organizations and partner with them.
One of the things that we've been doing, is we've been talking to them or talking to some of the VC firms that help fund them and proactively tell them some of the issues that we face and some of the areas where we're looking for solutions so that they can build technology that can solve them. If you think through, you know, our rationale for all of this, just as we've been good at integrating acquisitions, we've also developed a skill set in integrating technology into our platform. Again, we feel like that's a competitive advantage. We have a full-time team that spends all their time looking for potential partners around the world.
They look at hundreds of fintechs every single year in an effort to figure out which of them, we could partner with. Myself, my team, folks literally across Morgan Stanley, we spend our time meeting with them several times a year and really digging into the ones that they find the most interesting. I mentioned OpenAI. That's how we found OpenAI well over a year ago, before anybody had even heard their name. And we've been building capabilities with them for this entire time. You know, one thing I'll certainly say is, AI is going to change the way advisors work, how they access intellectual capital, and ultimately, how they serve clients. I'm 100% convinced around that. We have a...
We have several different initiatives that we're working on right now, some of which we're in the process of rolling out right now to advisors that are truly, I think, game changing. You know, things are moving fast in the space. These aren't theoretical opportunities. These are things that are happening right now.
Can we stay on the topic of tech for a bit? You know, one thing I'd say is, you, as a wealth business, have been talking about tech for a while, the investment Morgan Stanley has made in technology. Can you maybe delve deeper into why you think a tech is differentiated, what investments you've made, and try and tie that into how that translates to the, you know, I don't know, trillion dollars M&A or your longer term goals?
Sure, sure. I mean, like I said, when I went through the phases just before, we realized, very early on, technology is gonna be a key driver for advisors and a key driver for growth. When we first called it modern wealth management years ago, and we even, you know, one of it, We started throwing expos so we could literally, demonstrate the way our technology works, and we were experimenting at the time, even with early stages of machine learning and AI, when we built Next Best Action. It was all designed to either make advisors more productive, more efficient, or help and ultimately, serve their clients better, and building all of these types of capabilities into the platform.
We've been partnering with fintech organizations now for a long time and building it into the platform. It's a game changer. Advisors that come, you know, to our firm, we can see their productivity increase, and they will tell you that a lot of the reason why that happens is specifically because of the platform and the type of technology that we offer them. Like I said, we're entering into an era where I think that the pace of change is going to only accelerate. Any organization that isn't embracing the new types of technologies, that isn't embracing AI and innovation, is gonna be really left behind.
Is there anything proprietary or is any sort of moat around it? Why can everyone copy what Morgan Stanley has done?
This gets back to the point that I made a little bit earlier around integration. For technology to be truly effective in, as part of the platform, it needs to be fully integrated into all of your systems. You know, if it's gonna help an advisor make a decision, it needs to be integrated into your taxonomy, into your client database. It needs to be integrated into your order entry system, potentially. You need to have from both a risk and a regulatory perspective, you need to be able to monitor that type of technology and monitor the types of outputs that you have.
You need to be able to automatically create key metrics for you that you can assess. It needs to. From a data perspective, I think one of the areas around technology that people tend to overlook a lot of the time is around data. You need data cleanliness. Like I mentioned, you need to have the right kind of taxonomy. It sounds very rote. It also is not the most exciting thing to talk about. Ultimately, organizations that haven't spent years and have true organizations that create the right kind of data governance, all you have is garbage in, garbage out, and that's typically the main reason why it's difficult to integrate some technology.
You know, is it a moat? We think it largely is, and it's mostly around the time and energy and resources it takes to integrate into the overall platform.
Right. Okay. I'll take a question from the audience, which is, maybe a bit of, something similar on competitive dynamics. The question is: Why can't other advisor companies or financial advisors or wealth management firms, replicate the workplace strategy, which obviously has been very successful for Morgan Stanley?
You know, a lot of it gets back to the type of ecosystem that I was describing earlier. When we talk to a client in the workplace, when we talk to one of the companies, one thing that I should even highlight is that we're going to them as Morgan Stanley. We're solving a lot of the problems or a lot of the issues that they have literally across the organization. In some respects, you can almost think about it from inception into maturity. We're the largest provider of cap table management in the United States. We can manage their cap table when they're private.
We can take them public, partnering with ISG and the investment bank. We can do the DSP. We can obviously serve their wealth management needs in the process. We can provide for their capital markets needs, advise them as they become more mature. To the extent that they issue stock to their employees, we can manage their stock plan. We have an extensive ability to provide workplace education and financial wellness-type offerings, both online and in person. To the extent that they have questions about advice or about financial services, they want to talk to an advisor, obviously, we can make that accessible to them immediately.
That's a pretty powerful ecosystem that we're talking about when you go and you talk to a company about serving all of their needs across all of that. When I talked earlier about the integration of the technology and the kind of ecosystem that we put together, everything that we learn about that company, every piece of data that they give to us, we learn more about that company. Regardless of which organization they're talking to within Morgan Stanley, it's one company to them. In whether it's the individual or whether it's the company, the data is fully accessible, and we have machine learning in the background, all designed to help anticipate their needs.
Great. Another question from the audience. This one's about generational wealth transfer. I think over the coming years, clearly, baby boomers transfer wealth to millennials. How are you positioned for that trend?
That's obviously something that we spend a great deal of time on. Our advisors not only see themselves as advisors for the principal of the family, but for the entire family. We've built out organizations within our Wealth Management to help with that process, whether it's planning for the, you know, whether it's estate planning, whether it's around philanthropy, we literally have seminars for the children of wealthy families to help them understand money and how they should think about it, how they should think about taxes. You know, when heads of families, wealthy families, when they pass, the amount that the...
I don't know if we've ever given the actual stats, but we keep a vast majority of the wealth as it passes down from generation to generation.
Even before the E*TRADE acquisition?
Yeah.
Okay.
Yeah.
Interesting. All right. Then kind of one last one from the audience. A lot of different business models or channels now in Morgan Stanley, it's not the simple FA business that it was a few years ago. How does that mix evolve to get to $10 trillion, right? Are you similar mix? Is something going faster or slower? How does that impact revenues? Just talk about the changing mix dynamic as you go towards $10 trillion.
Yeah, so it's interesting, right? The way we think about the mix is we're not actually targeting an outcome, we're targeting the process, and the process will lead to an outcome. Really this gets back to the funnel concept that I described earlier. What we're trying to do is continually develop new client relationships, regardless of where they might come in, whether they come in through the workplace, whether they come in through a direct channel, whether they come through family office or one of the many other channels where we have, where we could meet clients, whether they're referrals from our investment bank.
We're constantly going to increase the number of client relationships that we have, and then deepen those relationships. That's, in some respects, that's where a lot of the technology came in. It helps us to predict their needs, it helps us to better reach them. In some respects, and I've, I've said this before, one of the areas, if you think about financial services, this is not something that financial services organizations have traditionally done very well, but they have been done well by tech companies. How do you digitally deepen relationships with clients? We've hired more people from tech organizations into our data and analytics organization than we have from traditional competitors, because that's what we're deepening those relationships.
One thing to just keep in mind is our goal is to just grow with them as their needs change and as their lives become more complex. Many of them will need advice at some point. We'll be there for them when they need advice. We'll be helping them to understand what the value of advice is along the way, so that they can reach for it when the time is right for them. A lot of them, maybe even the majority of them, may never need advice or may never seek for advice. That's okay. We have plenty of ways to serve them really well.
The way we talk about it internally is we want to meet them where they are and serve their needs however their needs are best met. You know, enough of them will need advice to drive the kind of growth that we talked about.
Great. I think that's most of our questions here. Maybe address the elephant in the room, Andy. James is CEO, for those who know, transition or succession has been a topic. You've been mentioned as one of the, prime candidates. Just curious, your thoughts on that, any comments, to make?
Sure. Yeah, let me just state the obvious. James has done an incredible job of leading the organization. In terms of succession, look, Ted, Dan, and I, we've had a lot of success together over the years. We respect each other, we genuinely like each other, both personally and professionally, and that those are relationships that have been built over a really long period of time. We are focused on doing our jobs, just as we've always been. Ultimately, succession is a decision for the board, and we're all really comfortable letting the process run its course.
Fantastic. Thank you very much for that, and thank you for the presentation.
Thank you.
Thank you.